India’s notoriously unreliable property developers have been put on notice: clean up your act, or you could end up in jail. Under laws that came into force Monday, developers have to use at least 70 percent of sale proceeds to complete residential projects, rather than funnel money to other jobs, and will no longer be allowed to start pre-selling apartments before all building approvals are obtained. Developers who don’t comply with the new laws face up to three years in jail.
The moves are aimed at cleaning up an industry where more than 30 percent of housing projects run at least a year over schedule, and developers are known for corner-cutting tactics such as starting work before all approvals are granted and using sub-standard materials. Developers accused of wrongdoing have seen their shares tumble, even as the main property index has surged this year.
The changes may wipe out thousands of small developers who can’t comply, according to property consultancy Liases Foras Real Estate Rating & Research Pvt.
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“The new law was required as a deterrent,” said Pankaj Kapoor, founder of Liases Foras. “Now developers won’t be able to misuse and siphon money in the manner they did in the past. Many builders who didn’t have the net worth were leveraging themselves beyond their means. Those loopholes are being plugged.”
Under the new laws, developers will be required to post quarterly updates on the progress of projects on the regulator’s website, and any defects found within five years must be fixed by the developer free-of-charge within 30 days.
The tougher regime expands a crackdown on errant developers that has seen executives from Unitech Ltd., Orbit Corp. and Hubtown Ltd. arrested or jailed on a range of charges from fraud to failing to meet deadlines for finishing homes.
The owners of Unitech, brothers Sanjay and Ajay Chandra, were last month arrested on charges of cheating homebuyers and delaying the building of houses. Pujit Aggarwal, the chief executive officer of Orbit Corp. was jailed in September on cheating charges, while Hubtown’s Vimal Shah was arrested for fraud and siphoning money from a state-sponsored housing project. Shah and the Chandra brothers are out on bail while Aggarwal is still in jail.
Orbit shares have slumped almost 50 percent since July, and Unitech has declined 32 percent in the same time. However, developers have rallied this year, with the S&P BSE India Realty Index gaining 55 percent, outstripping a 12 percent advance in the broader S&P BSE Sensex Index.
The new laws will increase homebuyers’ confidence in the industry by forcing out fly-by-night developers, giving an edge to established firms, according to JPMorgan Chase & Co.
Developers have also welcomed the changes. The laws will improve consumer confidence and push unprofessional companies from the sector, said Abhishek Lodha, managing director of Lodha Group, one of India’s largest property developers.
Smaller developers may struggle to stay afloat as the new laws impose costly restrictions on them, Pirojsha Godrej, the chairman of Godrej Properties Ltd. said last year. He estimates that only a few hundred of nation’s thousands of developers will survive.
Still, the impact of the changes may be diluted as each state government needs to ratify the laws, and some are still to do so. Despite the fact that the deadline has passed, only nine Indian states and six union territories so far have taken steps to implement the rules, according to a report from CRISIL Research. The report also found that many states have diluted some crucial aspects of the law.
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Home sales, which slumped in the wake of the government’s surprise November ban on some high-denomination currency notes, have since shown some signs of a recovery, according to PropTiger.com, an Indian real estate advisory firm. Sales across nine cities rose 19 percent in the three months ended March 31, rebounding from a 20 percent slump the previous quarter, the data showed.
Real estate has long been a place where Indians have parked cash, often using money on which taxes haven’t been paid.
Property prices have also taken a hit since the currency ban and home prices may decline 20 percent and land prices could plummet as much as 25 percent, according to analysts’ projections.
“The housing market cannot hope to begin flourishing again unless there is a very supportive regulatory environment that governs it,” said Mumbai-based Anuj Puri, chairman of JLL Residential.
Builders often acquired and built on plots which didn’t have clear ownership titles and development permission, Puri said. Some builders have accepted cash payments, cheating the government of stamp duty and registration revenues, he said.
“With the law kicking in, the time has finally come for homebuyers in India to breathe free and invest confidently,” Puri said. “No more will unscrupulous smaller builders, or even larger organized developers, be able to take buyers for a ride.”